Reading about Latvia’s probable eurozone entry at the beginning of 2014 and then perhaps Croatia by 2017, I remembered some wise words from economist Russ Roberts.
During 2010, he presented a fascinating monologue Econtalk podcast in which Adam Smith and David Ricardo converge. The Smith story, he said, is economies of scale while the Ricardo story is trade. But one needs the other. And when they combine, the result is larger markets that facilitate wealth creation by supporting economies of scale and specialization.
In many ways, the Smith/Ricardo synergy echos the genesis of the eurozone. Listening to economist Timothy Taylor in an excellent “Great Courses” lecture, we hear how the transaction costs of European borders retarded the wealth creation that the free movement of goods and services, workers and financial capital would nurture.
And that is why the eurozone makes sense.
The challenge, as Taylor points out, is the tension between a single monetary union and multiple fiscal policies.
Still though, countries like Latvia and Croatia perceive the huge benefits of functioning within a larger trade arena. Following its Baltic neighbor Estonia, Latvia will become eurozone country #18. (For each, the first step was EU, European Union, membership and then the eurozone could come next.)
Sources and Resources: You can listen to the Russ Roberts Econtalk podcast here and, you can purchase one of the best “Great Courses” I have listened to here, “America and the New Global Economy.” For more on European Union and eurozone history, the BBC has some good interactive graphics here (above source) and here.